Introduction:
Sales can be made in various ways namely, description, sample or combination of sample and description, tenders. Just like the above-stated ways, an auction is also one of the ways in which a sale can be made. Auction has become a very common word after IPL has come into the picture because, in IPL, we have seen a lot of auctions taking place of the players and teams being made. Before diving deep into the contractual nuances surrounding the auctions, let’s understand the meaning and scope of the auction.
The word ‘Auction’ has been derived from the Latin word “auctum” which means to increase. It is the act of selling of goods in a predetermined public place in the presence of prospective buyers. It is a method of sale wherein, bids are invited and a contract is struck when the hammer is slammed.
Despite the popular belief that hammers hitting blocks equals the formation of the basic selling contract, a normal auction sale necessitates the creation of multiple types of contracts in addition to the evident principal sale agreement.[1]A robust barter system is favourably encouraged by an auction sale. Furthermore, because auction sales take place at a specified time and location, attendees will be focused on obtaining a fair price for the item in issue. A competitive bidding environment can result in a better price than a standard open market sale.
Consequently, the auction setting provides a window of opportunity for the microeconomic variables of supply and demand to play out more intensely. The presence of two (or more) enthusiastic potential purchasers can drive the price of a property much over its typical market value.[2]
Sale by Auction in India
The Sale of Goods Act of 1930 contains the statutory provisions governing auction sales. Section 64 of the Act establishes guidelines for auction sales. The rules are outlined as follows:
- When items are sold in lots and are placed up for auction, each category or lot of goods will be subject to a separate contract of sale.[3]
- Only when the auctioneer proclaims the sale of goods to be completed by the fall of the hammer or any other normal manner, or by announcing, is the auctioneer considered to have completed the sale. Until then, the bidder might withdraw his bid at any time.[4]
- At the auction, the seller can reserve his right to bid, but he must do so clearly. He has the option of appointing someone to bid on his behalf.[5]
- If the seller does not express his right to bid, he will not be able to bid at the auction, nor will he be able to nominate someone to bid on his behalf. Such bids should not be accepted or entertained by the auctioneer. Any sale made in violation of this guideline is illegal and can be denounced as fraudulent.[6]
- Once the reserve price is set, the auctioneer cannot sell the subjected items for less than the reserve price.[7]
- In any instance, if the seller or his agent knowingly and purposefully pretends to bid in order to inflate the price of the items, the transaction is voidable at the buyer’s discretion. The auctioned property cannot be sold on credit or according to the auctioneer’s wishes.[8]
Analysis
An auctioneer represents the seller of the commodities or property that will be auctioned. His responsibilities, however, go beyond just running the auction. In the case of a land sale, he will operate on behalf of the vendor in the same manner as an estate agent would, getting involved in every stage of the process from pre-inspection through contract signing.[9]
The auctioneer, in particular, would typically assess the property up for auction, gathering and preparing the required information for the auction catalogue, which will include pertinent pictures, descriptions, and guiding prices. He will also be in charge of publicising the auction and informing potential bidders about the assets on sale.[10]
In M. LachiaSetty and Sons Ltd. v. The Coffee Board, Bangalore,[11] the Supreme Court held that an auctioneer can set his own terms for holding an auction and such conditions would further govern the rights of the parties. Moreover, there is an implied warranty in Sale by Auction, which reflects that the auctioneer is deemed to have the lawful right to sell the goods and that there is no defect in the principal’s title.
Four essential contracts underpin the auction process in a typical auction transaction. There is an inter-bidder contract, often known as a “taking part contract.” Next, the auction house and each individual bidder also have a contract. Furthermore, there is the sale contract itself, which exists between the seller and the bidder whose bid is approved. Last, if the auction involves the sale of a property without reserve, there is the possibility of a secondary (or collateral) contract between the auctioneer and the highest bidder.[12] However, our focus in this article is based on the seller and buyer agreement.
In such agreements, there is a need for distinction between auctions that have a “sale with reserve” and those that have a “sale without reserve.”[13] In the event of auctions with a reserve price, the situation is pretty clear as a base price, which is also referred to as the Reserve Price, is maintained. Here, it should be noted that reserving the right to bid for a seller is quite a different thing from the reserve price.[14] If a sale is subject to a reserve or minimum price, it does not mean that the seller has a right to bid.[15]
When the auctioneer invites bids for a certain property, he or she is also inviting the individual bidders to a feast. The relevant bidder then makes an offer. Normally, that bid is not approved right away. The auctioneer encourages more offers for the property. If no additional bids are received before the auctioneer’s hammer falls, the bid will be accepted.
The auctioneer (on behalf of the seller) accepts the bid at this stage, and the agreement is formed. Furthermore, if a lot has a reserve price, the auctioneer is arguably unable to remove the lot once the reserve price is met. Following that, it appears that once the best bid is reached, the auctioneer acknowledges it with the fall of the hammer.
Knock-out-agreement, which is a combination among the intending bidders to stifle competition is not unlawful[16] and a seller can protect himself by a reserve bid.[17] In addition to the above two kinds of auction sales, there are two more i.e. sale with a right reserved to bid by or on behalf of the seller and a sale with condition that the highest bidder shall be declared a purchaser.[18]
The Indian Contract Act, 1872 contains no special provisions relating to the formation of a contract at an auction sale. However, auctions and tenders are important to consider with respect to offers. We are all familiar with the movie version of an auction, where precious artefacts are bid upon in elegant rooms and lacks of rupees are made with a slight raise of a hand. Perhaps, it is a business tool where the binding contract is made between two parties. But would an announcement to hold an auction constitute only an invitation to treat and not an offer in itself?
For instance, A wants to conduct an auction of rare pieces of art. B reads the advertisement in the newspaper and travels a long distance to bid for the same. However, on arrival, he learns that the bid is cancelled and sues A for a breach of contract. Here, the question is would A be liable? Was there a contract? Was there an offer or only a declaration of intent to hold an auction, an auction where one could then come and make offers to buy articles for a price? Well, A is not liable in this case as the advertisement given by him was merely an expression of intent to hold an auction and was not an offer. So where there is no offer, there will be no contract.
An auction announcement is only an invitation to the general public to come and make offers at the auction. In this regard, we can take a look at the case of Harris v. Nickerson,[19] wherein the facts of the case are almost similar to the above-mentioned illustration. The plaintiff claimed expenses and compensation for the Breach of Contract as the auction was withdrawn three days prior and not notice to that effect was given to the plaintiff, who had travelled a long distance to attend the auction.
The plaintiff claimed that his attending the auction was an acceptance of the advertisement to hold the auction. The court held that the advertisement was given merely as a declaration of intent to hold an auction. At the auction again, the persons would be invited to make bids. Those bids would be offers, which are then accepted by the auctioneer when he or she slams down the hammer. Similar is the situation with tenders as well.
In certain cases, the law presumes that there is only an invitation to treat i.e. one is inviting others to make offers, however, this is only a presumption. It will depend on the intent of the bidder, the language of the offer and what a reasonable person would think. If the offer is certain, not open to negotiation, with the intent to be bound as soon as someone accepts, then it can still be considered as an offer.
The offer is accepted by the auctioneer when he signifies his acceptance in a customary manner. Before such acceptance, the bidder may withdraw his bid and the auctioneer may withdraw the goods. However, it was clarified in the case of Barry v. Davies,[20] that if the auctioneer withdraws an item from sale after it has been auctioned without reserve, he will be in breach of contract with the highest bidder.
A bid may also be retracted before the hammer is down. In JoravarmullChampalal v. JeygopaldasGhanshamdas,[21] the appellant made a bid at an auction (highest bid) but before the property was knocked down, he discovered that the property was subject to a mortgage and retracted his bid. However, the auctioneer knocked down the property to him and the owner of the property sued him. The court held that the bid was no more than an offer and he was entitled to withdraw the same before it was accepted by the property being knocked down to him by the auctioneer.
Similarly, in Samasundaram Pillai v. Provincial Govt. of Madras,[22] Madras High Court applied the same principle to the situation where a bid had been provisionally accepted and was subject to confirmation by higher officers. The bidder can withdraw before such confirmation takes place. The reason why a bidder enjoys the liberty to withdraw the bid is that the contract is concluded only when the bid is confirmed and formal communication of it is given to the bidder. Moreover, the auctioneer can provide the manner in which bids can be revoked.
In M. LachiaSetty and Sons Ltd. v. The Coffee Board, Bangalore,[23]one of the auction rules provided that telegraphic bids will not be considered. The defendant made his bid by filing a bid form at the spot. Subsequently, before the announcement of the results, he revoked his bid via a telegram. But the Board accepted his bid and he was held liable for breach of contract by the Supreme Court.
It is pertinent to note that the person whose bid is accepted in the auction, shall become a party to the contract of sale and is lawfully bound to pay the price he has bidden for the goods. If he defaults in making such payment, he shall be held liable for the goods and shall pay loss, if any, till the time goods are sold. However, in case of pretending bidding[24] or damping, the sale shall be voidable at the option of the buyer and the buyer shall not liable for any loss.
Conclusion
Auctions contain a lot of legal ramifications, especially when it comes to contract law. It’s a flexible technique that allows prospective purchasers to compete against one another. An auction sale is a tool by which interested and potential purchasers bid for an item or thing that they are interested in, with the highest bidder receiving the item. The auction is ceremoniously closed with the dropping of the hammer, indicating acceptance of the offer.
Live auctions, online auctions, sealed-bid auctions, and other types of auctions are available. An auctioneer works as the seller’s agent and does so in good faith. He shall not engage in deceptive practises or take advantage of special privileges without the knowledge of the principal or the seller. If there is no appropriate statute, the laws of the agency apply.
References:
[1]Payne v. Cave, (1789) 3 Term and Section 64(2) Sale of Goods Act, 1930.
[2] James Brown and Mark Pawlowski, How Many Contracts in Auction Sale, University of Greenwich.
[3]Section 64(1) Sale of Goods Act, 1930.
[4]Section 64(2) Sale of Goods Act, 1930.
[5]Section 64(3) Sale of Goods Act, 1930.
[6]Section 64(4) Sale of Goods Act, 1930.
[7]Section 64(5) Sale of Goods Act, 1930.
[8]Section 64(6) Sale of Goods Act, 1930.
[9]Supra Note 2.
[10]Avtar Singh Contract and Specific Relief Act, Twelfth Edition, EBC.
[11](1981) SC 162.
[12]Mike Brandly, December 2009, The Three Types of Auction Contracts, Auctioneer Blog.
[13]Pyles v. Goller, 674 A.2d 35.
[14]Section 64(5) Sale of Goods Act, 1930.
[15]Section 64(3) Sale of Goods Act, 1930. See also Gillat v. Gillat (1869) LR 9 Eq 60.
[16]Hari v. Naro (1893) 18 Bom 342.
[17]Rawlings v. Gen Trading Co. (1921) 1 KB 635.
[18]Sir DinshawFardunjiMulla, The Sale of Goods Act & The Indian Partnership Act, 11th Edition, LexisNexis.
[19] (1873) LR 8 QB 286.
[20] (2000) 1 WLR 1962.
[21](1922) Mad 486.
[22](1947) Mad 366.
[23](1981) SC 162.
[24]Section 64(6) Sale of Goods Act, 1930.
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